An Accountant Explains The Excise Tax

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Throughout my years as an accountant there always seems to be a little bit of cloudiness about what an excise tax is. The best way I know to explain this tax is to have you change the word excise with penalty. This is a tax implemented by the government for not following the rules or doing things that they do not think you should be doing. For example, if you over contribute to a 401K plan or other retirement plan, then there will be a tax.

It Is a Penalty Tax

If you pull money out of your 401K or IRA early, that 10 percent tax on the early withdrawal is an excise tax. This is present because you are not playing by the rules. That money is intended for retirement, so if you pull it out early or you put too much money in, the intent is to penalize you for acting in a way that is against the public policy of the tax code.

How Much Is An Excise Tax?

Excise taxes normally range in the 10 to 15 percent range, but depending on what it is, I have seen it as high as 50 percent. In a couple of very rare instances, it is 100 percent tax. The higher taxes are usually associated with actions that show a complete disregard for the rules. If you want to learn more about the excise tax, you should visit the IRS' website or talk to an accountant.

Do Not Forget the Sin Tax

Do you remember those taxes on gambling, cigarettes, and liquor? Those taxes are commonly referred to as "sin taxes," but fall under the classification of excise taxes. The government believes that it is bad to smoke, drink, or gamble, so they tacked a premium tax on to these activities.

Looking More at the Sin Taxes

The federal government knows that as smokers get older they may have a harder time taking care of medical bills. A certain percentage of these people roll onto Medicare or Medicaid and then the government will have to provide more for them. This is the same logic behind the tax on alcohol. The government's logic is that they will actually have to take care of these people sooner and more often, in order to help them deal with certain problems that smoking and drinking cause.

There Is an Excise Tax on Imports

You will find excise taxes on imported goods. Take a pen for example. If a pen comes in from China, it will probably be cheaper than a pen produced in the United States. Due to the price difference, the United States adds an excise tax to try to equalize to cost of the U.S. pen with the cost of the imported pen. Therefore, promoting the purchase of U.S. made products.

Excise taxes are normally implemented when you go against the rules, in some cases intentionally, in many cases unintentionally. Either way the government wants to penalize you for something that you are not supposed to be doing or that they frown upon. If you have any questions about this tax or any other taxes, you should talk to an accountant.

About the Author:
Reno CPA Tim Nelson has been helping individuals and businesses with their tax preparation and financial planning for years. Tim has a passion for numbers, so that you don't have to. Visit Tim Nelson's Website to download the FREE Business and Tax Preparation Organizer.

To see what else Tim is talking about, visit Tim's Blog.



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